Bonds Revisited

Two recent cases in the High Court, Richina Pacific v AAI (formerly Vero Insurance) & Samson [2017] NZHC 1686 and Custom Street Hotel v Plus Construction [2016] NZHC 3049 shine the light on the use of bonds in New Zealand.

The first, Richina v Vero, concerned a development in Parnell.  The work had been practically complete, apart from a car stacker (which was being problematic), when Mainzeal Property and Construction went into receivership.  The project manager issued a practical completion certificate on the basis that the car stacker was outstanding work, and the property owner, Samson, made demand under the bond.  There were two difficulties with the demand – first, that the bond was (yet again) unclear as to whether or not it was on-demand or conditional; and the second, whether or not the bond had been released by the issue of the practical completion certificate.

The High Court held that the bond was clearly not on-demand and, in more difficult to follow reasoning, that as the contract did not provide for sectional completion, the practical completion certificate had not, in fact, been issued.

A clear lesson can be learned from the case is that if a bond is to be on-demand, then it must clearly be stated as such.  Interestingly, Justice Hinton accepted the UK position, outlined in IIG Capital LLC v Van Der Merwe [2008] EWCA Civ 542 and in Vossloh Aktiengesellschaft v Alpha Trains (UK) Ltd [2010] EWHC 2443 (Ch), that a bond will be presumed to be conditional, unless there is clear wording to the contrary.

In the second case, Custom Street Hotel  v Plus Construction, Plus had procured a bond in favour of Custom Street Hotel clearly in on-demand form; payment was expressly to be made “on demand without proof or condition.”  However due to the substantial amount secured by the bond (25% of the contract price), any such demand had to be accompanied by a certificate from the Engineer that the contractor was in default and the amount claimed properly due under the contract.  In the ordinary course, following the decision of Justice Ramsay in AES-3C Martiza East EOOD v Credit Agricole Corporate and Investment Bank [2011] EWHC 123 (TCC) and the seminal decision of Lord Denning MR in Edward Owen v Barclay’s Bank [1978] QB 159 (CA), if a demand appears to be correct on its face, under an on-demand bond the amount demanded must be paid up without further investigation.

The position in the Custom Street Hotel case, however was significantly different in that Plus Construction did not try to prevent the bond issuer, ANZ, from paying on the demand; it injuncted the Engineer from issuing his certificate and Custom Street Hotel from making demand, following the approach taken in Simon Carves v Ensus [2011] EWHC 657 (TCC).  The injunctive proceedings were settled in favour of arbitration, at which Plus Construction prevailed.  Custom Street Hotel appealed to the High Court (with leave), and Justice Gilbert concurred with the arbitrator that there was no basis for demand under the bond.  The matter was heard by the Court of Appeal (Kós P with Harrison & Clifford JJ) in October, and its decision is awaited with interest.

Attached is a paper delivered to the New Zealand Institute of Quantity Surveyors in Wellington and Auckland in September of this year.

Bonds (NZIQS)